Auto-Automotive Limited (“AA Ltd”) imports motor-vehicles for sale and leasing in the local market.

On 1 January 20x1, it entered into a sales-type lease agreement with a customer, Paylater Limited (“PL Ltd”) for a car that had just been imported. The agreement required a payment of $20,000 per year, at the end of each year, over six years based on a special financing rate of 2% per annum. The fair market interest rate at that time was 5% per annum and this rate was known to everyone. Typical of a sales-type lease, the ownership of the car would be transferred at the end of the sixth year.

In order to use the car locally for a period of ten years, one has to purchase a Certificate of Entitlement (“COE”) from the local government. At the end of ten years, the local laws require all the vehicles to be scraped at zero salvage value. The cost of the car to AA Ltd was $80,000. This excluded the price of the COE.

In order to use the car, PL Ltd paid an additional $28,486 in cash for the COE on 1 January 20x1 to the relevant authorities. Both AA Ltd and PL Ltd depreciate their motor vehicles on a straight line basis over ten years, have December 31 financial year-ends and adopt financial reporting standards identical to the Singapore Financial Reporting Standards (“FRSs”). In presenting your answers, please round your answers to the nearest dollar.

Required:

(a) Apply FRS 116 Leases, prepare the necessary journal entries required by AA Ltd to record the transactions for the year ending 31 December 20x1. While journal narratives are not required, you are required to clearly indicate the dates on which the journal entries are prepared. (15 marks)

(b) Apply FRS 116 Leases, prepare the necessary journal entries required by PL Ltd to record the transactions for the year ending 31 December 20x1. While journal narratives are not required, you are required to clearly indicate the dates on which the journal entries are prepared. (15 marks)